Global Oil Market Equation looks Bullish for Oil Prices

Global Oil Market Equation looks Bullish for Oil Prices

We had posted an article on 6th Sept 2017, which may seem relevant now since oil prices have shot up despite most of the world holding on to strong views on further weakness in the oil market. Here is the report for your reference:

Despite the huge uncertainties related to the two massive hurricanes that hit the U.S., the global oil market looks tighter than it has in a long time, according to a new report from the International Energy Agency.

Global oil supply fell in August for the first time in four months, the IEA said, a result of a dip in OPEC’s oil production, combined with refinery maintenance and sizable outages from Hurricane Harvey. World oil supply fell by 720,000 barrels per day (bpd) in August compared to July, a significant decline that will aid in the market’s progress towards rebalancing.

Multiple outages contributed to the decline in global output. Hurricane Harvey resulted in U.S. oil production falling by 200,000 bpd in August—outages that occurred mostly in the Eagle Ford shale and offshore in the Gulf of Mexico. But OPEC also saw its collective output fall by 210,000 bpd in August, mainly from disruptions in Libya.

The supply outages will go a long way toward adding some momentum to the rebalancing effort, even if some of them are only transitory.

Another notable issue, the IEA said, was that U.S. oil supply is quite a bit lower at this point than it expected, and not just because of Harvey. The agency singled out the fact that U.S. oil production actually declined in June from a month earlier, an unexpected development. That meant that the Harvey disruptions resulted in output declines from a lower-than-anticipated base.

The demand side of the equation also looked bullish. The IEA revised up its forecast for oil demand growth this year, upping it to 1.6 million barrels per day (mb/d) from its July estimate of just 1.5 mb/d. The second quarter stood out, with quarterly growth of 2.3 mb/d year-on-year—the highest in two years. The Paris-based energy agency said that demand in OECD countries (i.e., rich industrialized countries that tend to have weak demand growth rates) “continues to be stronger than expected, particularly in Europe and the U.S.”

The stronger forecast is notable not just because it puts oil demand growth at its hottest in a long time, but also because the IEA essentially shrugged off any lingering effects from the storms in the U.S., concluding that the “impact on global oil market is likely to be relatively short-lived.”

The IEA did point out that the U.S. Gulf Coast is more strategically important to the global oil market than ever. Texas and Louisiana exports some 4 mb/d of refined products along with 0.8 mb/d of crude oil. Crude oil exports are also set to rise further, so in a global context, the U.S. Gulf Coast has emerged as one of the most vital energy hubs, meaning that “in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail,” the IEA cautioned.

But the oil market appears to be handling the outages without too much trouble, certainly aided by the fact that inventories have been “comfortable.” That doesn’t mean that there aren’t significant atypical market conditions in Texas, Florida and the U.S. as a whole (there certainly are), but only that at the global level, the oil market won’t change all that much.

As for inventories, OECD stocks held steady in July from a month earlier, which is actually a bullish sign given that they typically rise at this point in the year. Crucially, refined products stocks in the OECD are only 35 million barrels above the five-year average. “Depending on the pace of recovery for the U.S. refining industry post-Harvey, very soon OECD product stocks could fall to, or even below, the five-year level.”

This point is significant. The oil market has been drowning in too much supply for three years, but at least for products (gasoline, diesel), inventories are getting close to average levels. OPEC’s goal is to bring crude oil inventories back to average levels, not just products. But if product inventories get back to normal, refineries will have to work harder to ensure that there is enough gasoline and diesel to meet consumer demand. That ultimately means a greater drawdown in crude stocks could be forthcoming. In other words, this is a sign that the market is rebalancing.

To be sure, at this point, few expect huge price spikes. In fact, some analysts warned everyone not to get too excited, not least because oil supply is still expected to grow by quite a bit through next year.

“The IEA sees strong demand growth and declining OECD inventories at the moment. But it also sees an increasing challenge for OPEC in 2018,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “Thus if OPEC wants to see further reductions in OECD inventories in 2018 they need to maintain cuts all through 2018 in order to push OECD inventories yet lower. If not, they will instead rise again.”

There are a lot of question marks about 2018, but in many ways, the IEA just published one of its more bullish oil market reports in quite a while. Supply fell, demand is at its strongest in two years, and inventories are drawing down at a good pace. – Nick Cunningham

China’s Petrol-Powered Car Ban Could Cripple The Oil Market

China is joining the UK, France, and Norway in banning vehicles powered by fossil fuels.

If China, the world’s largest new vehicle market with sales of 28.03 million units last year, were to ban gasoline and diesel vehicles in the market, the impact on petroleum would be huge. But how pervasive is the fossil-fuel ban in global markets key to new vehicle sales and petroleum consumption?

During an automotive forum over the weekend in Tianjin, Xin Guobin, the vice minister of industry and information technology, said the government is working on a timetable to end production and sales of fossil-fuel powered vehicles.

The national government has been headed in this direction for a few years, issuing generous “new energy vehicle” subsidies to automakers to build electric vehicles and for consumers to buy them. The subsidies are being cut back this year and the government is expected to adopt a zero-emission vehicle mandate similar to California’s where automakers would be mandated to manufacture a set percentage of electric and fuel cell vehicles in the short term.

China is open to direction from other countries as it deals with increasingly crowded cities, booming auto sales, and air pollution in growing metro areas. The country had already committed to cap its carbon emissions by 2030.

European nations are dealing with backlash from the Volkswagen diesel emissions cheating scandal that started two years ago, with more investigation and pressure coming from nations and the European Union. Diesel-powered cars make up about half the market in Europe with consumers looking for alternatives since the scandal broke. Strict carbon emissions policies are also leading toward banning fossil-fuel powered vehicles.

German chancellor Angela Merkel has suggested that Germany may follow its European neighbors on the fossil-fuel vehicle ban. Seeking her fourth term as chancellor in the Sept. 24 election, Merkel has been facing criticism from her opponent for being too tied to German automakers to enforce strict emissions policies. The German government has become tougher, investigating several automakers since the VW scandal broke in 2015.

A new think piece by a Bloomberg columnist sees the impact of China’s expected decision to have a huge impact on the sale of new vehicles and petroleum in the future.

A chart shows that nearly 80 percent of the global auto market is pushing toward a phase-out of petroleum cars and adoption of electric vehicles. If that comes to be, demand for gasoline and diesel would drop dramatically.

However, there are few major hurdles that must be crossed before this will come anywhere near adoption on a mass scale.

One of them is that the U.S., the world’s largest economy ahead of China, may see its fuel economy and emissions targets softened soon by the federal government. Soon after taking over the White House this year, President Donald Trump announced he would be reconsidering the Obama administration’s mandates over the next year. White House comments indicate the rules will be lightened up.

Trump’s June 1 decision to leave the Paris climate accord also suggests that the federal government is backing off the plan Obama negotiated with automakers a few years ago.

Japan is another country that has yet to ban fossil fuel vehicles. The government has been taking a more cautious approach, supporting efforts by Japanese automakers to embrace hydrogen fuel cell vehicles. But sales of these vehicles have been quite small so far.

The chart shows that so far, Brazil, Canada, Russia, Mexico, and Italy have no significant plans in place toward banning fossil-fuel vehicles. These markets are dependent on oil production and overseas shipment, and may be less inclined to impact the industry through national fossil-fuel mandates.

India has tentative phase-out plans. If the government does issue a mandate, it will have a major impact on the nation that’s expected to soon surpass China in population and that has been seeing new vehicle sales grow in recent years.

For now, the odds are against governments wanting to see fossil-fuel vehicles disappear. Bloomberg New Energy Finance reports that last year, there were about 695,000 electric vehicles sold versus 84 million new vehicles sold worldwide. There are about a billion petroleum-powered vehicles owned around the world. Getting rid of them will take quite a while. – Jon LeSage